Hyperinflation In Zimbabwe: When Bartering Came Back Into Style

Hyperinflation has resulted in some of the worst economic situations imaginable over the last century, but it always has a raison d'etre.

There have been a few times in the world where a nation's economy and currency has become essentially useless and citizens resort to bartering with cigarettes, food, and anything else that retains value in lieu of money, including using neighboring nations' currencies. The most recent of these situations occurred in Zimbabwe (formerly Rhodesia) where the economy was essentially intentionally dismantled. Inflation reached a rate of roughly 89 sextillion or 10^21 percent, which was good enough to place it in second place, just behind Hungary's monthly rate of inflation in 1946, which resulted in a similar catastrophe.

Hyperinflation usually has fairly evident causes, and it is defined as an inflationary upward cycle that does not reach equilibrium; i.e., currency and prices fail to keep up with the value of goods. It is also characterized by dishonest governmental monetary policy or excessive printing and revaluing of currency in an effort to keep up with inflation. Perhaps the most evident historical example is that of post-World War I Germany, whose economy was essentially dismantled by the treaty of Versailles. The victors, particularly France, were attempting to keep Germany's economy down, and they succeeded perhaps a bit too well. By doing this, the Allied powers virtually assured a state of malcontent that would set the world up for the Great Depression and eventually World War II. In a scene common to examples of hyperinflation, workers often took their currency home in barrels. Hyperinflation in Germany reached epidemic proportions, and this drove great numbers of citizens into the arms of the Nazi Party, which happily used popular support to reoccupy Germany's industrial regions and rearm the nation in preparation for war.

Zimbabwe's situation was equally predictable. The government began a process that it called "Fast Track Land Reform" at the turn of the century in order to reclaim land from white business owners. What it failed to realize were that these land holdings formed the majority of profit and food production within the nation. These land holdings were removed from prior ownership by the government without compensation, and this process resulted in an effective dismantling of the nation's food production, trade, and economic operation. What followed was a chain of events that were entirely predictable, and were repeated a number of times in the previous century.

Farm production in Zimbabwe decreased by at least 73 percent from 2000 to 2008. The complete disregard by the government of Zimbabwe for property rights meant that farms were essentially destroyed. By destroying farm production, the government also destroyed the country's largest labor market, which effectively destroyed any chance of resumption of stability. Soon, prices were exploding out of control, and the government adopted the typical tactics tried in previous similar situations: they instituted price controls and when these failed, they repeatedly revalued the currency. None of the tactics worked, and at one point, prices of goods in Zimbabwe were doubling about once per day. Zimbabwe was finally forced to allow foreign currency for trade, which evened out the progressively unstable rate of price growth. By the end of the hyperinflation, Zimbabwe was effectively destitute, and living conditions had degraded to their worst point in twenty years or more. Since then, prices have settled down a bit, and Zimbabwe is on the road to recovery.

The note pictured is an example of hyperinflation in Germany in the 1920's. All historical cases of hyperinflation have resulted in insane printing of currency. In Zimbabwe, a $100 trillion Zimbabwean dollar note was worth about 100 USD at the time of printing. It quickly became devalued after that point.








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Posted on Sep 19, 2010